Commodities As Portfolio Insurance

May 06, 2013


PCRIX also typically has a high allocation of TIPS with its collateral, while DFA uses short-term investment-grade bonds for its collateral. In addition, both funds avoid the dates that are used by the indexes when they roll their contracts over. And they both use a shifting maturity approach to determine the month they'll use to buy contracts.

We'll first look at DCMSX, which has an expense ratio of 0.35 percent. From inception in December 2010 through December 2012, the fund's annualized return was -0.8 percent, 1.7 percent better than the -2.5 percent return of the benchmark DJ-UBS index.

In the first two months of 2013, that trend continued, as the fund lost 1.6 percent and the index lost 1.8 percent. We now turn to PCRIX, which has a much higher hurdle to overcome than does DFA's fund since its expense ratio is 0.74 percent.

From inception in July 2002 through December 2012, the fund returned 9.5 percent, outperforming the DJ-UBS index by 4.5 percent a year. The fund's total return was 160.3 percent, 93.5 percent higher than the return of the index. In the first two months of 2013, the fund returned -1.5 percent, outperforming the index, which returned -1.8 percent, by 0.3 percent.

The evidence seems clear that a well-designed fund can not only replicate the returns of its benchmark, but to date, they have been able to significantly outperform the index even after expenses. Now let's turn to the right way to look at commodities by seeing how their addition to a portfolio impacted the performance of the portfolio.

The table below shows the results for the 10-year period 2003-2012. Note that during this period, the S&P 500 Index returned 7.1 percent and the DJ-UBS Commodities Index returned just 4.1 percent. Thus, one would think that in hindsight adding a 5 percent allocation of commodities and reducing the stock allocation by the same amount would not have been a good idea.


Annualized Return (%)

Annual Standard Deviation (%)

60% S&P 500/40% 5-Year Treasury



55% S&P 500/ 5% DJ-UBS Commodities Index/40% 5-Year Treasury




As you can see, the portfolios had almost identical returns with virtually the same level of volatility. The portfolio without commodities had both slightly higher returns and slightly higher volatility. As even during periods when the insurance that commodities have historically provided wasn't needed—as both stocks and bonds had good returns over the 2003-2012 period—the addition of commodities certainly didn't hurt the portfolio.

On the other hand, if the future brings supply shocks (like an oil embargo or a Middle East war that disrupts supply), or if we experience the high inflation many fear might be created by the Fed's easy monetary policy, history suggests that commodities would help the portfolio during such periods. And after all, that's why one should consider including commodities in the first place: as portfolio insurance.


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